Tax evasion and innovation under credit constraints: evidence from Eastern European SMEs

Purpose This study aims to focus on a specific type of tax evasion through bribing tax officials and investigate its influence on the innovation of Eastern European SMEs. Using the sixth wave of the business environment and enterprise performance survey data, which covers the period from 2018 to 2020, this paper selects 3,798 companies that have been inspected by tax officials. Design/methodology/approach This study considers five innovation types: product, process, radical, green innovation and an innovation construct built using the joint correspondence analysis. Before running the regressions, this paper uses the propensity score matching to reweight the sample. This paper examines the moderating effect of credit constraints on the studied link. Besides, this paper distinguishes between the European Union (EU) and the non-EU countries. Findings The results highlight a positive association between tax evasion and the product, process and radical innovation. This effect is more intense on the process innovation likelihood. Yet, a negative effect on green innovation has been registered. Besides, a moderating effect of credit constraints was confirmed only for process innovation. Bribing tax officials is considerably more pronounced in the EU neighborhood. Research limitations/implications The paper’s implications are twofold: First, it offers insights for policymakers to balance tax regulation and innovation incentives. Second, it suggests that tailored financial solutions can mitigate the need for unethical practices while promoting sustainability. Originality/value This paper provides a unique analysis of how tax evasion through bribing tax officials influences various innovation types in Eastern European SMEs, highlighting the differential impact on green and process innovation while addressing the moderating role of credit constraints on these relationships.